Edited version of your private ruling

Authorisation Number: 1012552810770

Ruling

Subject: Employee share schemes

Relevant facts and circumstances

The Company submitted an application for a private binding ruling on aspects of its employee equity plans (the Plans).

The Company develops, manufactures and markets products.

The application for a private binding ruling (application) stated that:

· the Company has two equity based compensation plans which are currently in use

· the Company established an employee share trust (the EST) to facilitate the provision of shares in the Company for Australian employees and executives

A summary of each of the Plans is as follows:

General Plan (GP)

GP allows all employees to share in the Company's financial success by enabling them to invest in it on attractive terms. It provides all employees with the opportunity to subscribe for shares at a discount to the applicable market price, as follows:

· Employees receive dividend distributions and capital returns and are able to vote at the Company's general meetings.

· If an employee's employment is terminated, the employee will automatically be withdrawn from the GP. The entire balance of the employee's contribution account at the time will be refunded at this time.

· The Board may apply a Holding Lock to some or all Shares acquired by an employee under the GP for the duration of the relevant Holding Lock Period.

· The GP uses the EST as outlined below for contributions by employees to acquire Shares.

Performance Plan (PR)

The PR has been established to provide the Company with a mechanism to attract key prospective employees, to retain them and to strengthen the link between employee performance and increases in shareholder value.

The PR broadly operates as follows:

· The Board may issue an invitation to eligible employees to acquire "Performance Rights" and "Performance Options" (together "Options") with the absolute discretion to develop and amend any policies in relation to these Options.

· The invitation will specify various aspects of the Options such as performance hurdles and period, test dates, expiry date, exercise price, etc.

· Performance Rights granted by the Company under the Plan will be granted for no consideration payable by employees, unless otherwise determined by the Board. Performance Options will be granted with an exercise price based on market value of a Share at the time of the original invitation.

· Employees must achieve a minimum "good" rating under the Company's performance appraisal system for each year from the grant date to the test date.

· Vesting of the component measured against the EPS performance hurdle will occur where the Company earns a specified compound annual growth rate of EPS at which point 50% of the instruments will vest, rising on a straight line basis to 100% vesting if the compound annual growth rate of EPS reaches or exceeds the target.

· If all eligible Options have not vested by the end of the performance period, performance may be reassessed at one-yearly intervals for up to a further five years (depending on the tranche).

· Each Option can be converted into one ordinary Share in the Company on satisfaction of the vesting period and the performance hurdles.

· An Option does not confer on an employee the right to participate in new issues of Shares by the Company, including by way of bonus issue, rights issue or otherwise.

· Shares issued as a consequence of the exercise of Options will, from the date of allotment, rank equally with all other issued Shares, and will be entitled in full to those dividends which have a record date for determining entitlements after the date of issue.

· The PR uses the EST as outlined below (refer "Operation of the EST" section below).

· Employees are absolutely entitled to the shares as against the Trustee of the EST from when the Shares are allocated to them.

Operation of the EST

The EST broadly operates as follows:

· it was established as a sole purpose trust to acquire shares for Australian employees of the Company.

· it is funded by contributions from the Company and where applicable from employees.

· such funds will be used by the Trustee of the EST to acquire the shares in the Company either on-market or via a subscription for new shares.

· such Shares acquired by the Trustee will be immediately allocated to the relevant employees who will become absolutely entitled to those Shares at that point in time.

· the Trustee will be permitted to sell shares on behalf of an employee where directed by the Company or the employee to do so.

· the Trustee of the EST is an independent party.

Relevant legislative provisions

Income Tax Assessment Act 1936 Division 13A (repealed)

Income Tax Assessment Act 1936 subsection 139C(4) (repealed)

Income Tax Assessment Act 1936 section 139DB (repealed)

Income Tax Assessment Act 1936 section 139E (repealed)

Income Tax Assessment Act 1936 Part IVA

Income Tax Assessment Act 1936 section 177A

Income Tax Assessment Act 1936 paragraph 177D(b)

Income Tax Assessment Act 1936 subsection 177F(1)

Taxation Administration Act 1953 Division 359

Fringe Benefits Tax Assessment Act 1986 section 66

Fringe Benefits Tax Assessment Act 1986 section 67

Fringe Benefits Tax Assessment Act 1986 subsection 67(1)

Fringe Benefits Tax Assessment Act 1986 section 136

Fringe Benefits Tax Assessment Act 1986 subsection 136(1)

Fringe Benefits Tax Assessment Act 1986 paragraphs 136(1)(f)-(s)

Income Tax Assessment Act 1997 section 8-1

Income Tax Assessment Act 1997 subsection 8-1(1)

Income Tax Assessment Act 1997 subsection 8-1(2)

Income Tax Assessment Act 1997 Division 83A

Income Tax Assessment Act 1997 Subdivision 83A-B

Income Tax Assessment Act 1997 section 83A-10

Income Tax Assessment Act 1997 section 83A-10(1)

Income Tax Assessment Act 1997 section 83A-10(2)

Income Tax Assessment Act 1997 subsection 83A-20(2)

Income Tax Assessment Act 1997 Subdivision 83A-C

Income Tax Assessment Act 1997 paragraph 83A-105(1)(a)

Income Tax Assessment Act 1997 section 83A-210

Income Tax Assessment Act 1997 subsection 130-85(4)

Income Tax Assessment Act 1997 paragraph 130-85(4)(a)

Income Tax Assessment Act 1997 paragraph 130-85(4)(b)

Income Tax Assessment Act 1997 paragraph 130-85(4)(c)

Income Tax Assessment Act 1997 section 130-90

Income Tax Assessment Act 1997 section 995-1

Income Tax Assessment Act 1997 subsection 995-1(1)

Income Tax (Transitional Provisions) Act 1997 Subsection 83A-5(2)

Issue 1

Question 1

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the Income Tax Assessment Act 1997 (ITAA 1997), in respect of the irretrievable cash contributions made by it to the Trustee of the EST to fund the subscription for or acquisition on market of the Company's Shares by the EST in respect of Options or Shares issued pursuant to the Equity Plans?

Answer

Yes

Detailed reasoning

An employer is entitled to a deduction under section 8-1 of the ITAA 1997 for a contribution paid to the trustee of an EST that is either:

· incurred in gaining or producing assessable income ('first limb') or

· necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income ('second limb')

to the extent the contribution is not private or domestic in nature, is not of capital or of a capital nature, does not relate to the earning of exempt income or non-assessable non-exempt income and deductibility is not precluded by another provision of the ITAA 1997 or ITAA 1936.

To qualify for a deduction under section 8-1 of the ITAA 1997 a contribution to the trustee of an EST must be incurred.

As a broad guide, a taxpayer incurs an outgoing at the time the taxpayer owes a present money debt that they cannot escape. This must be read subject to the propositions developed by the courts, which are discussed in more detail in Taxation Ruling TR 97/7 and Taxation Ruling TR 94/26.

A contribution made to the trustee of an EST is incurred only when the ownership of that contribution passes from an employer to the trustee of the EST and there is no circumstance in which the employer can retrieve any of the contribution - Pridecraft Pty Ltd v. Federal Commissioner of Taxation (Pridecraft); Spotlight Stores Pty Ltd v. Commissioner of Taxation (Spotlight).

Application to the facts

The stated purpose of the Company in establishing and funding its employee share plans is to provide an employee equity incentive plan to further align the interests of staff and shareholders, by employees earning significant rewards from the acquisition of equity in the company. The Company has established an EST and advised that it will make irretrievable cash contributions to it in order to provide eligible employees with Shares.

GP

Under the GP, at the end of a period, the Company will transfer employee contributions to the Trustee, and instruct the latter to either subscribe for or purchase Shares on-market.

The Share acquisition price will be the market value of the Shares in respect of a Share Acquisition Date. However, the employees will pay to the Company a discounted amount of the fair market value of a Share on either the first or last day of the applicable Offering Period. The Company will pay the employees' contributions, together with any further amounts (i.e. the difference between the fair market value of the Shares and the amount paid by the employees) required to enable the Trustee of the EST to either subscribe for or purchase the Shares on-market. The Company must pay to the Trustee the full amount of any Shortfall.

PR and EST

The EST is funded by contributions from the Company and where applicable the transfer of contributions from employees, such as for the purchase of Shares under the GP.

Such funds will be used by the Trustee of the EST to acquire Shares in the Company, either on-market or via a subscription for new shares, based on written instructions from the Company. Shares acquired by the Trustee will be immediately allocated to the relevant employees who will become absolutely entitled to those Shares at that point in time. Given these facts, it is considered that the contributions made to the EST by the Company will be incurred at the time the contributions are made.

Necessarily incurred in carrying on a business

Further, to be deductible under section 8-1 of the ITAA 1997, a contribution must have been incurred in gaining or producing assessable income or necessarily incurred in carrying on a business for the purpose of gaining or producing assessable income.

In order to satisfy the second limb of section 8-1 of the ITAA 1997 there must be a relevant connection between the outgoing and the business. An expense will have the relevant connection to the business when it is 'desirable or appropriate in the pursuit of the business ends of the business' (Ronpibon Tin NL and Tongkah Compound NL v. FC of T (Ronpibon); Magna Alloys & Research Pty Ltd v. Federal Commission of Taxation (Magna Alloys)).

Where an employer:

· carries on a business for the purpose of gaining or producing assessable income and engages employees in the ordinary course of carrying on that business

· makes a contribution to the trustee of an EST

· at the time the contribution is made, the primary purpose of the contribution is for it to be applied, within a relatively short period of time, to the direct provision of remuneration of employees (who are employed in that business),

then, such a contribution would ordinarily satisfy the nexus of being necessarily incurred in carrying on that business.

Application to the facts

In regard to contributions satisfying the nexus of being necessarily incurred in carrying on a business, the Company:

· employs a workforce to develop, manufacture and market products

· contributes funds to the Trustee of the EST to acquire shares in the Company, either on-market or via a subscription for new Shares, to reward, motivate, attract and retain employees

· ensures Shares acquired by the Trustee will be immediately allocated to the relevant employees who will become absolutely entitled to them.

Given these facts, it is considered that the irretrievable contributions made to the EST by the Company for the purpose of remunerating employees are an outgoing in carrying on the Company's business, for the purpose of gaining or producing assessable income.

Character of a contribution

Where a contribution satisfies either limb of subsection 8-1(1) of the ITAA 1997, it may still be capital or of a capital nature. Pursuant to subsection 8-1(2) of the ITAA 1997, the contribution will not be deductible to an employer under section 8-1 to the extent to which it is capital or of a capital nature.

Whether an outgoing is capital or revenue in nature can generally be determined by reference to the test articulated by Dixon J in Sun Newspapers Ltd and Associated Newspapers Ltd. v. Federal Commissioner of Taxation:

There are, I think, three matters to be considered, (a) the character of the advantage sought, and in this its lasting qualities may play a part, (b) the manner in which it is to be used, relied upon or enjoyed, and in this and under the former head recurrence may play its part, and (c) the means adopted to obtain it; that is, by providing a periodical reward or outlay...

A contribution to the trustee of an EST is of capital or of a capital nature, where the contribution secures for an employer an asset or advantage of an enduring or lasting nature that is independent of year to year benefits that the employer derives from a loyal and contented workforce.

Where a contribution is, ultimately and in substance, applied by the trustee of an EST to subscribe for equity interests in the employer (for example shares), the employer has also acquired an asset or advantage of an enduring nature.

The combined operation of subsections 8-1(1) and 8-1(2) of the ITAA 1997 may require apportionment of a loss or outgoing into deductible and non-deductible components, where a single loss or outgoing is incurred for more than one purpose or on items of a differing nature.

Where a contribution is made for the purpose of securing for the employer advantages of both a revenue and capital nature, but the advantages of a capital nature are only expected to be very small or trifling by comparison, apportionment may not be required.

Where the primary purpose of the employer in making the contribution is to remunerate employees within a relatively short period of the contribution being made, it is considered that any amount of the contribution attributable to securing a capital structure advantage will only be very small or trifling where it is intended that:

· any direct interest in the employer acquired by the trustee of the EST (for example shares) will be transferred to employees within that relatively short period, and

· such shares will not be on-sold to third parties at that time or shortly thereafter.

Application to facts

Under the Plans we consider the capital structure advantage will only be very small or trifling as:

· the operation of the EST and the Rules of each Plan are such that Shares allocated to each employee will generally be transferred into the name of the relevant employee subject to any sale restriction that applies to such Shares

· Shares acquired by the Trustee on behalf of employees will be immediately allocated to employees who will become absolutely entitled to them at that point in time

· under GP, employees elect to hold their Shares for periods of one year or three years, after which they can sell them

· for the PR, if all eligible Options have not vested by the end of the performance period, performance may be reassessed at one-yearly intervals for up to a further five years

· the Company's employee share plans provide employee equity incentive plans to further align the interests of staff and shareholders, by employees earning significant rewards from the acquisition of equity in the company.

Therefore, apportionment for the capital structure advantage will not be required.

Conclusion

In sum, the irretrievable contributions the Company makes to the EST, to acquire Shares, whether by on-market purchase or subscription, are allowable deductions under section 8-1 of the ITAA 1997.

Question 2

Will the Company obtain an income tax deduction, pursuant to section 8-1 of the ITAA 1997, in respect of costs incurred in relation to the operation and ongoing administration of the EST?

Answer

Yes

Detailed reasoning

The Company will incur various costs in relation to the implementation and on-going administration of the EST. For example, the Company will incur costs associated with the services provided by the Trustee of the EST. These costs are likely to include:

· Employee plan record keeping

· Production and dispatch of holding statements to employees

· Provision of annual income tax return information

· Acquisition of shares and allocation to participants; and

· Management of employee termination.

In addition to the services to be provided by the Trustee of the EST, the Company will also incur various implementation costs, including the services provided by the company's accounting and legal advisors.

In accordance with the Trust Deed, The Trustee is not entitled to receive from the Trust any fees, commission or remuneration in respect of its performance of its obligations as Trustee of the Trust. The Company may pay to the Trustee from the Company's resources any fees, commission or remuneration and reimburse any expenses incurred by the Trustee as the Company and the Trustee may agree from time to time. The Trustee is entitled to retain for its own benefit any such remuneration or reimbursement. Such costs are likely to include brokerage costs incurred by the Trustee of the EST (for example, where the Trustee is directed by the Company to acquire Shares on-market), as well as other Trustee expenses such as the annual audit of the financial statements of the EST.

The costs incurred in relation to the implementation and on-going administration of the EST are deductible under section 8-1 of the ITAA 1997 as either:

· Costs incurred in gaining or producing the assessable income of the Company; or alternatively

· Costs necessarily incurred in carrying on the Company's business for the purpose of gaining or producing its assessable income.

The view that the costs incurred by the Company are deductible under section 8-1 of the ITAA 1997 is consistent with ATO Interpretative Decision ATO ID 2002/961 (ATO ID 2002/961) in which it was decided that such costs are part of the ordinary employee remuneration costs of a taxpayer. Also, consistent with the analysis in Question 1 (above), the costs are revenue and not capital in nature, on the basis that they are regular and recurrent employment expenses, and are deductible under section 8-1 of the ITAA 1997.

Question 3

In respect of the Division 83A options, are irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company's Shares by the EST, deductible to the Company at a time determined by section 83A-210 of the ITAA 1997?

Answer

Yes

Detailed reasoning

The provision of money to the trustee of an employee share trust by the employer for the purpose of remunerating its employees under an employee share scheme is an outgoing in carrying on the employer's business and is deductible under section 8-1 of the ITAA 1997.

The deduction under section 8-1 of the ITAA 1997 would generally be allowable in the income year in which the employer incurred the outgoing but under certain circumstances, the timing of the deduction is specifically determined under section 83A-210 of the ITAA 1997.

Section 83A-210 of the ITAA 1997 provides that if:

(a) at a particular time, you provide another entity with money or other property:

(i) under an arrangement; and

(ii) for the purpose of enabling an individual (the ultimate beneficiary) to acquire, directly or indirectly, an ESS interest under an employee share scheme in relation to the ultimate beneficiary's employment (including past or prospective employment); and

(b) that particular time occurs before the time (the acquisition time) the ultimate beneficiary acquires the ESS interest;

then, for the purpose of determining the income year (if any) in which you can deduct an amount in respect of the provision of the money or other property, you are taken to have provided the money or other property at the acquisition time.

Section 83A-210 of the ITAA 1997 will only apply if there is a relevant connection between the money provided to the trustee and the acquisition of ESS interests (directly or indirectly) by the employee under an ESS in relation to the employee's employment.

The Company's Plans, described in this ruling, have facts comparable to those set out in ATO Interpretative Decision ATO ID 2010/103 (ATO ID 2010/103) which considers the timing of deductions allowable to an employer in respect of money provided to the trustee of an employee share trust.

An ESS interest in a company is defined in subsection 83A-10(1) of the ITAA 1997 as either a beneficial interest in a share in the company or a beneficial interest in a right to acquire a beneficial interest in a share in the company.

An option granted to an employee under the scheme will also be an ESS interest as it is a right to acquire a beneficial interest in a share in a company. A share purchased by the trustee to satisfy the right to acquire shares under the scheme, for an employee in relation to the employee's employment, is itself provided under the same scheme.

The granting of ESS interests, the provision of the money to the trustee under the arrangement, the acquisition and holding of the shares by the trustee and the allocation of shares to the participating employees are all interrelated components of the employee share scheme. All the components of the scheme must be carried out so that the scheme can operate as intended.

As one of those components, the provision of money to the trustee necessarily allows the scheme to proceed.

Consequently, the provision of money by the Company to the EST is considered to be for the purpose of enabling the participating employees, indirectly as part of the employee share scheme, to acquire the ESS interests. A deduction for the purchase of shares to satisfy the obligation arising from the grant of ESS interests is therefore allowable to the employer in the year in which the money was paid to the trustee, under section 8-1 of the ITAA 1997.

However, the amount of money used by the trustee to purchase excess shares is intended to meet obligations arising from a future grant of ESS interests. The excess payment therefore occurs before the employees acquire the relevant ESS interests under the Company's Plans. Section 83A-210 of the ITAA 1997 will apply and the excess payment will be deductible to the Company in the year of income when the relevant ESS interests are subsequently granted to the employees.

Question 4

In respect of the Division 13A options, are irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company's Shares by the EST deductible to the Company?

Answer

Yes

Detailed reasoning

Subsection 83A-5(2) of the Income Tax (Transitional Provisions) Act 1997 (IT(TP)A 1997) will not be satisfied where participants have made an election under former section 139E of the ITAA 1936 to be taxed upfront in relation to options issued before 1 July 2009.

Accordingly, former Division 13A of the ITAA 1936 continues to apply to options issued before 1 July 2009. Former section 139DB of the ITAA 1936 will apply to determine the timing of any allowable deduction in respect of an irretrievable cash contribution made to the Trustee of the EST to purchase a share.

Former section 139DB of the ITAA 1936 states:

If, at a particular time, a person (the provider) provides another person with money or other property:

(a) under an arrangement; and

(b) for the purpose of enabling another person (the ultimate beneficiary) to acquire, directly or indirectly, a share or right, under an employee share scheme;

then, for the purpose of determining when any deduction is allowable to the provider in respect of provision of the money or other property, the provider is taken to have provided it not before the time when the ultimate beneficiary acquires the share or right.

Accordingly, as stated in ATO Interpretative Decision ATO ID 2005/181 (ATO ID 2005/181 (withdrawn), but still applicable to elections under former section 139E of the ITAA 1936):

Subsection 139C(4) of the ITAA 1936 provides that a taxpayer does not acquire a share under an employee share scheme if the taxpayer acquires the share as the result of exercising a right that the taxpayer acquired under an employee share scheme.

By the operation of subsection 139C(4) of the ITAA 1936 the shares transferred when the vesting conditions have been satisfied are not acquired by the participating employees under an employee share scheme. Therefore, section 139DB of the ITAA 1936 will only apply if there is the relevant connection between the money provided by the taxpayer to the trustee under the arrangement and the acquisition of the rights by the participating employees (the ultimate beneficiaries) under the plan.

The granting of the rights, the providing of the money to the trustee, the acquisition and holding of the shares by the trustee and the allocating of shares to the participating employees are all interrelated components of the plan. All the components of the plan must be carried out so that the plan can operate as intended. As one of those components, the providing of money to the trustee necessarily allows the plan to proceed. Consequently, the providing of money to the trustee is considered to be for the purpose of enabling the participating employees, indirectly as part of the plan, to acquire the rights available under the plan.

Accordingly, section 139DB of the ITAA 1936 determines the time when a deduction is allowable to the taxpayer (the Company) under section 8-1 of the ITAA 1997 in respect of the provision of money to the trustee of the EST. Therefore, pursuant to section 139DB of the ITAA 1936, a deduction is allowable at the time the rights are acquired by participating employees and only to the extent of that amount of the money provided to acquire shares to satisfy the obligations in relation to the rights acquired.

Question 5

Will the Commissioner seek to make a determination that Part IVA of the ITAA 1936 applies to deny, in part or full, any deduction claimed by the Company in respect of the irretrievable cash contributions made by the Company to the Trustee of the EST to fund the subscription for or acquisition on-market of the Company's shares by the EST?

Answer

No

Detailed reasoning

Part IVA ITAA 1936 contains a number of anti-avoidance provisions which give the Commissioner discretion to cancel a tax benefit, however before the Commissioner can exercise the discretion under subsection 177F(1) ITAA 1936, three requirements must be met, as follows:

· there is a scheme

· a tax benefit was obtained or would be obtained in connection with it; and

· the scheme is one to which Part IVA applies.

As stated previously, the facts described in ATO ID 2010/103 are comparable to the facts relating to the Company's Plans, namely that an employer has established an ESS which complies with the provisions of Division 83A of the ITAA 1997.

The Company's Plans were established to provide an employee equity incentive plan to further align the interests of staff and shareholders and the structure of the employee share scheme, including the use of an EST have a range of commercial benefits for the Company.

The characteristics of the scheme, as described under the relevant facts and circumstances establish that the substance of the scheme is the provision of remuneration in the form of shares to participants in the Company's employee share scheme.

There is nothing in this arrangement to suggest a dominant purpose of seeking to obtain a tax benefit in relation to a scheme. Accordingly, the Commissioner will not make a determination that Part IVA of the ITAA 1936 applies to deny, in part or in full, any deduction claimed by the Company in relation to the irretrievable contributions made to the EST under the scheme.

Question 6

Is the provision of Options, Performance Rights and/or Shares by the Company to its employees under the Company's Plans a fringe benefit within the meaning of subsection 136(1) of the Fringe Benefits Tax Assessment Act 1986 (FBTAA 1986)?

Answer

No

Detailed reasoning

An employer's liability to fringe benefit tax (FBT) arises under section 66 of the FBTAA which provides that tax is imposed in respect of the fringe benefits taxable amount of an employer for the relevant year of tax. The fringe benefits taxable amount is calculated under the FBTAA 1986 by reference to the taxable value of each fringe benefit provided.

No amount will be subject to FBT unless a fringe benefit is provided.

In general terms, 'fringe benefit' is defined in subsection 136(1) of the FBTAA 1986 as being a benefit provided to an employee or an associate of an employee 'in respect of' the employment of the employee. However, certain benefits are excluded from being a 'fringe benefit' by virtue of paragraphs (f) to (s) of the 'fringe benefit' definition.

Paragraph (h) of the definition of fringe benefit in subsection 136(1) of the FBTAA 1986, states that a fringe benefit does not include:

a benefit constituted by the acquisition of an ESS interest under an employee share scheme (within the meaning of the Income Tax Assessment Act 1997) to which Subdivision 83A-B or 83A-C of that Act applies; or ….

The terms 'ESS interest' and 'employee share scheme' are defined in section 83A-10 of the ITAA 1997.

The Commissioner accepts that the Company's Plans as described in this application comprise an employee share scheme under which relevant ESS interests (being performance rights or options) are acquired by employees of the Company (or 'associates of those employees'), and the acquisition of those ESS interests are in relation to those employees' employment. The shares acquired by the Trustee to satisfy options to acquire shares are also provided to employees under that same employee share scheme.

Therefore, the granting of options under the Company's Plans to employees will not be subject to FBT because they are specifically not included in the definition of fringe benefits.

Shares granted to employees under the Company's Plans to satisfy options to acquire shares are not ESS interests acquired under an employee share scheme to which Subdivision 83A-B or 83A-C of the ITAA 1997 apply (see subsection 83A-20(2) of the ITAA 1997 and paragraph 83A-105(1)(a) of the ITAA 1997). Therefore the providing of these shares will not be specifically excluded from the definition of fringe benefits under paragraph (h) of the definition in subsection 136(1) of the FBTAA 1986.

As stated above, a fringe benefit will only arise under subsection 136(1) of the FBTAA 1986 where the benefit is provided by an employer to an employee or associate of the employee in respect of the employment of the employee.

Under the Plans, the benefit (beneficial interest in a share) that arises upon the exercise of an option or right is considered to be provided as a result of the employee exercising rights (previously obtained). This issue is considered to be analogous to that stated in ATO Interpretative Decision ATO ID 2003/316 (ATO ID 2003/316) which refers to the case of FC of T v. McArdle 89 ATC 4051;(1988) 19ATR 1901. In that case an employee was granted valuable rights in respect of his employment which he subsequently surrendered in return for a lump sum payment. The Court noted that what had occurred under the surrender agreement was not the granting of a valuable benefit, but the exploitation of rights received from the employer in previous years.

In the present circumstances, when an employee receives a performance right or option under the Company's Plans, they obtain a right to acquire a beneficial interest in a share in the Company. When these rights are subsequently exercised, any benefit received would be in respect of the exercise of these rights, and not in respect of employment.

Therefore, the benefit (i.e., beneficial interest in a share) that arises to an employee upon the exercise of options/rights granted under the Company's Plans, does not give rise to a fringe benefit as no benefit has been provided to the employee 'in respect of' the employment relationship.

Question 7

Will the irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company's Shares, be treated as a fringe benefit within the meaning of subsection 136(1) of the FBTAA 1986?

Answer

No

Detailed reasoning

Paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA states that a fringe benefit does not include:

a benefit constituted by the acquisition of money or property by an employee share trust (within the meaning of the Income Tax Assessment Act 1997); ….

An 'employee share trust' is defined in subsection 995-1(1) of the ITAA 1997 as having the meaning given by subsection 130-85(4) of the ITAA 1997.

Subsection 130-85(4) of the ITAA 1997 provides that an employee share trust for an 'employee share scheme' (having the meaning given by subsection 83A-10(2) of the ITAA 1997) is a trust whose sole activities are:

(a) obtaining shares or rights in a company; and

(b) ensuring that ESS interests in the company that are beneficial interests in those shares or rights are provided under the employee share scheme to employees, or to associates of employees, of:

(i) the company; or

(ii) a subsidiary of the company; and

(c) other activities that are merely incidental to the activities mentioned in paragraphs (a) and (b).

The right to acquire a share and the beneficial interest in the share that is acquired pursuant to the exercise of the right are both ESS interests within the meaning of subsection 83A-10(1) of the ITAA 1997.

An employee share scheme is defined in subsection 83A-10(2) of the ITAA 1997 as a scheme under which ESS interests in a company are provided to employees, or associates of employees (including past or prospective employees) in relation to the employees' employment.

The Company's Plans are an employee share scheme within the meaning of subsection 83A-10(2) of the ITAA 1997 because they are schemes under which rights to acquire beneficial interests in shares in the Company are provided to employees in relation to the employee's employment.

The Company has established the EST to acquire Shares and to allocate those Shares to employees to satisfy the rights acquired by the employees under the Plans. The beneficial interest in the Share is itself provided under an employee share scheme because it is provided under the same scheme under which the rights to acquire the Shares are provided to the employee in relation to the employee's employment, being an employee share scheme as defined in subsection 83A-10(2) of the ITAA 1997.

Therefore, paragraph 130-85(4)(a) and (b) of the ITAA 1997 are satisfied because:

· the EST acquires Shares,

· the EST ensures that ESS interests, as defined in subsection 83A-10(1) of the ITAA 1997, being beneficial interests in those shares, are provided under an employee share scheme, as defined in subsection 83A-10(2) of the ITAA 1997, by allocating those shares to the employees in accordance with the EST Deed and relevant Plan Rules.

Undertaking the activities mentioned in paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 will require that the Trustee undertake incidental activities that are a function of managing the Company's Plans and administering the EST.

For the purposes of paragraph 130-85(4)(c) of the ITAA 1997, activities which are merely incidental include:

· the opening and operation of a bank account to facilitate the receipt and payment of money;

· the receipt of dividends in respect of shares held by the EST on behalf of an employee, and their distribution to the employee;

· the receipt of dividends in respect of unallocated shares and using those dividends to acquire additional shares for the purposes of the employee share scheme;

· dealing with shares forfeited under an employee share scheme including the sale of forfeited shares and using the proceeds of sale for the purposes of the employee share scheme;

· the transfer of shares to employee beneficiaries or the sale of shares on behalf of an employee beneficiary and the transfer to the employee of the net proceeds of the sale of those shares;

· the payment or transfer of trust income and property to the default beneficiary on the winding up of the trust where there are no employee beneficiaries;

· receiving and immediately distributing shares under a demerger.

Activities that result in employees being provided with additional benefits (such as the provision of financial assistance, including a loan to acquire the shares) are not considered merely incidental.

Therefore, the EST is an employee share trust, as defined in subsection 995-1(1) of the ITAA 1997, as the activities of the trust in acquiring and allocating ESS interests meet the requirements of paragraphs 130-85(4)(a) and 130-85(4)(b) of the ITAA 1997 and its other activities are merely incidental to those activities in accordance with paragraph 130-85(4)(c) of the ITAA 1997. As such, paragraph (ha) of the definition of fringe benefit in subsection 136(1) of the FBTAA excludes the contributions to the Trustee of the EST from being a fringe benefit.

Accordingly, the Company will not be required to pay FBT in respect of the irretrievable cash contributions it makes to the Trustee of the EST to fund the acquisition of its shares in accordance with the Trust Deed.

Question 8

Will the Commissioner make a determination that section 67 of the FBTAA 1986 applies to increase the fringe benefits taxable amount to the Company, by the amount of tax benefit gained from irretrievable cash contributions made by the Company to the Trustee of the EST, to fund the subscription for or acquisition on-market of the Company's Shares?

Answer

No

Detailed reasoning

ATO Practice Statement Law Administration (PS LA 2005/24) has been written to assist those who are contemplating the application of Part IVA or other general anti-avoidance rules to an arrangement, including in a private ruling. It succinctly explains how section 67 of the FBTAA operates. Most notably, paragraphs 145-148 provide as follows:

145. Section 67 is the general anti-avoidance provision in the FBTAA. The operation of section 67 is comparable to Part IVA, in that the section requires the identification of an arrangement and a tax benefit, includes a sole or dominant purpose test and is activated by the making of a determination by the Commissioner. The definition of 'arrangement' in subsection 136(1) of the FBTAA is virtually identical to the definition of 'scheme' in section 177A of Part IVA.

146. Subsection 67(1) of the FBTAA is satisfied where a person or one of the persons who entered into or carried out an arrangement or part of an arrangement under which a benefit is or was provided to a person, did so for the sole or dominant purpose of enabling an eligible employer or the eligible employer and another employer(s) to obtain a tax benefit.

147. An objective review of the transaction and the surrounding circumstances should be undertaken in determining a person's sole or dominant purpose in carrying out the arrangement or part of the arrangement. Section 67 differs from paragraph 177D(b) in Part IVA in that it does not explicitly list the factors that should be taken into account in determining a person's sole or dominant purpose.

148. Subsection 67(2) of the FBTAA provides that a tax benefit arises in respect of a year of tax in connection with an arrangement if under the arrangement:

(i) a benefit is provided to a person;

(ii) an amount is not included in the aggregate fringe benefits amount of the employer; and

(iii) that amount would have been included or could reasonably be expected to have been included in the aggregate fringe benefits amount, if the arrangement had not been entered into.

It is clear, therefore, that the Commissioner would only seek to make a determination under section 67 of the FBTAA 1986 if the arrangement resulted in the payment of less FBT than would be payable but for entering into the arrangement. The point is made effectively in Miscellaneous Taxation Ruling MT 2021 (MT 2021) under the heading "Appendix, Question 18" where, on the application of section 67, the Commissioner states:

…As mentioned in the explanatory memorandum to the FBT law, section 67 may only apply where there is an arrangement under which a benefit is provided to a person and the fringe benefits taxable amount in respect of that benefit is either nil or less than it would have been but for the arrangement...

Further, paragraph 151 of Practice Statement 2005/24 provides:

151. The approach outlined in this practice statement (refer to paragraphs 69 to 113) to the counterfactual and the sole or dominant purpose test in Part IVA is relevant and should be taken into account by Tax officers who are considering the application of section 67 of the FBTAA.

In the present case the benefits provided to the Trustee by way of irretrievable contributions to the EST, and to eligible employees by way of the provision of options/rights and shares under the relevant Plans are excluded from the definition of a fringe benefit for the reasons given in the response to Question 6 (above). Therefore, as these benefits have been excluded from the definition of a fringe benefit and there is also no FBT currently payable under the existing Plans, nor likely to be payable under future alternative plans, the FBT liability is not any less than it would have been but for the arrangement.

Accordingly, the Commissioner will not make a determination that section 67 of the FBTAA 1986 applies to include an amount in the aggregate fringe benefits amount of the Company in relation to a tax benefit obtained under either of the current Plans from irretrievable cash contributions made by the Company to the Trustee of the EST to fund the acquisition of the Company's Shares in accordance with the Trust Deed.